### Currency Risk Management Case Study: Daltrey Company#### Transaction Details- **Company**: Daltrey Company- **Purchase**: Recording equipment- **Seller**: The Detours Inc.- **Amount**: £250,000- **Purchase Date**: September 21, 2020- **Payment Due Date**: December 19, 2020#### Forward Contract- **Date of Contract**: September 21, 2020- **Forward Contract Term**: 90 days- **Purpose**: To manage the exposed net liability position in UK Pounds- **Forward Rate**: £1 = $1.23#### Spot Rates- **September 21, 2020**: £1 = $1.21 - **December 20, 2020**: £1 = $1.24#### Financial AnalysisTo determine whether entering the forward contract worked well for Daltrey Company in terms of the US dollars needed to settle both transactions, compare the costs under different scenarios.1. **Without Forward Contract**: - Spot rate on December 20, 2020: £1 = $1.24 - Total cost in USD: £250,000 * $1.24 = $310,0002. **With Forward Contract**: - Forward rate: £1 = $1.23 - Total cost in USD: £250,000 * $1.23 = $307,500By entering into the forward contract, Daltrey Company managed to settle the transaction at a lower cost (by $2,500) compared to relying on the spot rate on the payment due date.#### ConclusionThe forward contract was beneficial for Daltrey Company. It allowed them to mitigate currency risk and save $2,500 on the transaction compared to the spot rate on the payment due date. This case highlights the utility of forward contracts in managing currency exposure effectively.

Answer: Yes, without the forward contact, company would have to pay more US $ to acquire € on…

Daitrey Company purcnased recording equip tours inc. September 21, The Detours, Inc. on December 19, 2020. Additionally, on September 21, Daltrey entered into a 90-day forward contract to purchase £250,000 at a rate of £1 = $1.23. The forward contract was entered into to manage the exposed net liability position in UK Pounds, but it was not designated as a hedge. The spot rates were: 09/21/20 £1 = $1.21 12/20/20 £1 = $1.24 Looking back on the entire situation (i.e., the original transaction and the forward contract) in terms of the US$ needed to settle both transactions, did entering into the forward contract work out well for Daltrey Company

Daitrey Company purcnased recording equip tours inc. September 21, The Detours, Inc. on December 19, 2020. Additionally, on September 21, Daltrey entered into a 90-day forward contract to purchase £250,000 at a rate of £1 = $1.23. The forward contract was entered into to manage the exposed net liability position in UK Pounds, but it was not designated as a hedge. The spot rates were: 09/21/20 £1 = $1.21 12/20/20 £1 = $1.24 Looking back on the entire situation (i.e., the original transaction and the forward contract) in terms of the US$ needed to settle both transactions, did entering into the forward contract work out well for Daltrey Company

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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